Szazi, Bechara, Storto, Reicher e Figueirêdo Lopes Advogados | View firm profile
Brazil is undergoing a long waited and comprehensive tax reform, comprising amendments to the Constitution and new laws.
The amendment to the Constitution (the PEC 45/2019) has passed in the House of Representatives by vast majority (375 out of 513) on July 7, 2023, and it is awaiting voting at the Senate, where it is also expected to be approved in the next few months.
The core of the constitutional reform aims at introducing a VAT able to amalgamate five different taxes currently charged at Federal (Industrial Product Tax, IPI; Social Contributions on Gross Revenues, PIS/COFINS), State (Sales Tax, ICMS) and City (Service Tax, ISS) levels, therefore simplifying a complex tax environment for businesses, with an expected raise of 2,39% on the GDP. However, other important reforms are undergoing, and they directly affect wealth, estate planning and philanthropy in the country that, according to the UN, is the 8th most inequal society in the world.
In Brazil, intergenerational wealth transmissions are charged by the ITCMD, a state level tax that assesses either transmissions at death or during life. The problem with the conception of the tax is that the law of successions ensures inheritance to heirs, but grants in life can be made to everyone, including to public institutions and nonprofit organizations. Thus, although aiming at charging taxes on intergenerational wealth transmissions, the Constitution ended creating a tax on philanthropy. This is changing with the PEC 45/2019 that, after extensive lobbying from the nonprofit sector, in which our law firm was directly involved, passed an amendment to the Constitution exempting from the ITCMD all grants received by nonprofit organizations with relevant public and social aims, religious entities, scientific and research institutes, and welfare organizations, as well to all grants made by those organizations while pursuing their institutional aims, thus extending the exemption to grantmakers institutions.
Besides the exemption, the PEC 45/2019 authorized states to introduce progressive tax rates depending on the wealth transmitted to heirs, therefore creating space to increase the ITCMD rate, currently at an average 4%. It also authorized states to charge the tax on estates and wealth transmitted abroad to Brazilian residents, and/or received in Brazil from foreign sources. This later change affects multi-jurisdiction wealth transmissions, currently not charged by the ITCMD due to Supreme Court rulings (see, for example, RE 851108), which are also under attack by the Provisional Measure 1171, of April 30, 2023, that introduced new taxation rules on individual income tax (IRPF) upon revenues received from foreign trusts, accrued investment incomes and profits from companies owned abroad, to be charged at a rate of 22,5%, starting on January 1st, 2024.
Finally, the PEC 45/2019 imposed to the Executive a 180-days deadline to submit to Congress a comprehensive legal reform on Income Tax, which certainly will eliminate or at least severely reduce the income tax exemption on dividends paid by Brazilian companies, the most common source of income of the upper class. All put together, the legal scenario is expected to dramatically change for the highest incomes and wealth in Brazil.